Cobalt Excitement - Dr Stephen Bartrop

08/3/2017

As part of the paid subscription Breakaway Mining Research Daily and Weekly Reports, Dr Stephen Bartrop - Director Breakaway
Research, has written a report breaking down the cobalt sector, including recommendations of which cobalt companies are good investments. To receive these recommendations, you will need tosubscribe to the Breakaway Mining Research Daily and Weekly by clicking here.
Here is an extract of this report (without recommendations).

Cobalt Excitement

Late last week (23rd February 2017) the Financial Times alerted the world to the cause in the recent run in the cobalt price. The article
was titled “Electric-car makers on battery alert as hedge funds stockpile cobalt" and outlined that in a bold wager on higher prices, half a dozen
funds, including Switzerland-based Pala Investments and China’s Shanghai Chaos, have purchased and stored an estimated 6,000 tonnes of cobalt,
worth as much as $280 million, according to the investors, traders and analyst sources. The report highlights that the stockpile is equivalent
to 17% of last year’s production of the metal.

Readers will know that bullish demand forecasts are emanating from its use in Lithium batteries where increasing demand is forecast from Chinese electric-car
makers, Elon Musk’s Tesla and other electric car manufacturers. CRU has forecast a supply deficit in 2017 by 900 tonnes and followed by demand
growth of 20% pa for the next five years. The electric car industry which itself experienced a 41% production increase in 2016, accounts for half
the annual consumption.

Breakaway Research has monitored the steady but unusual increase in the cobalt price over the last few weeks which has appeared to be driven by speculation
rather than real demand, and confirmation that this has indeed been driven by fund speculation provides that explanation. Interestingly, during
the 2003 – 2008 resources boom, the accumulation of physical commodities accounted for a significant portion of the commodity price increases experienced
then and enhanced the returns for investors on stocks leveraged to these rising prices.

Hence, many fund investment strategies involve identifying tangible, underlying supply/demand imbalances in a particular commodity and then taking
a long position to capitalise on this imbalance. The consequence of this positioning can be to accelerate the price increase beyond what would
normally be expected, but then the price tends to soften when this investment is completed and/or identified in the market.

Tech metals including metals involved in batteries are in demand, particularly when a number of these metals are sourced from countries with a high
sovereign risk, or China. In the past we have researched lithium and approximately a decade ago, recognised that lithium supply was unlikely to
match the demand that would emerge from electric cars and scooters (under StockResource research banner).

What are the implications? We like the outlook for cobalt as outlined below, it is a key component of Li-Co batteries. However cobalt is also a by-product
of nickel mining (particularly nickel laterites) as well as some copper mines. As base metal prices like nickel and copper increase, it will stimulate
new production in these base metals, which will lead to increased cobalt supply. We believe that investment therefore needs to be directed at resilient,
multi-commodity projects and the presence of cobalt as a by-product should be viewed as a ‘bonus’ to project returns rather than the sole reason
for the investment.

Investment Opportunities

Breakaway Research has reviewed the majority of ‘cobalt’ companies and presented details on these companies in the following table (table removed for
non-subscribers).

What is notable is that the current market enthusiasm for cobalt companies has pushed the market capitalisation of many of these companies to significantly
higher levels than the market would normally attribute to an undeveloped project. While this can be a reflection of the marketing skill of the
various management teams, in combination with an esoteric commodity such as cobalt, it can lead to future uncertainty and share price volatility
as the capital costs to develop these projects comes to light.

Many of these projects have been around for years and may only become economic at higher commodity prices, with cobalt providing a higher by-product
credit offsetting perhaps weaker nickel prices. In fact, Breakaway Research believes that many of these projects remain uneconomic, as the total
revenue package may not be able to support the capex required for development. Financing will not be able to attract the debt levels typical of
other projects and hence, project development may be heavily reliant on dilutive equity.

Our ‘best’ selection for cobalt exposure is (Subscribe to find out)
and we have included this company as a Buy in our Speculative Portfolio. This Company has a modest market capitalisation for a
Company with operating mines and offers exposure to a suite of commodities which are integral to battery manufacture. As noted earlier, cobalt
production is often a by-product of nickel and copper production, so as the prices for these commodities increase, the cobalt supply will also
increase.

Cobalt Background

Supply

Firstly it is worth considering recent events, trends, and issues and these are succinctly documented by the US Geological Survey (USGS), a leading
Government body which investigates most commodities and their relevance to the US.

It notes that the Congo (Kinshasa) continued to be the world’s leading source of mined cobalt, supplying more than one-half of world cobalt mine production.
With the exception of production in Morocco and artisanally mined cobalt in Congo (Kinshasa), most cobalt is mined as a byproduct of copper or
nickel. In 2016, global cobalt mine production decreased, mainly owing to lower production from nickel operations. The USGS expect growth in world
refined cobalt supply was forecast to increase at a lower rate than that of world cobalt consumption, which was driven mainly by strong growth
in the rechargeable battery and aerospace industries. As a result, the global cobalt market was expected to shift from surplus to deficit.

It also notes that China is the world’s leading producer of refined cobalt and the leading supplier of cobalt imports to the United States. Much of
China’s production was from ore and partially refined cobalt imported from Congo (Kinshasa); scrap and stocks of cobalt materials also contributed
to China’s supply. In 2015 and 2016, China’s State Reserve Bureau purchased cobalt for its stockpile. China was the world’s leading consumer of
cobalt, with nearly 80% of its consumption being used by the rechargeable battery industry.

Table 1. USGS World Mine Production and Reserves

Source: USGS 2017

In terms of substitutes the USGS reports that in some applications, substitution for cobalt would result in a loss in product performance. Potential substitutes
include barium or strontium ferrites, neodymium-iron-boron, or nickel-iron alloys in magnets; cerium, iron, lead, manganese, or vanadium in paints;
cobalt-iron-copper or iron-copper in diamond tools; copper-iron-manganese for curing unsaturated polyester resins; iron, iron-cobalt-nickel, nickel,
cermets, or ceramics in cutting and wear-resistant materials; iron-phosphorous, manganese, nickel-cobalt-aluminum, or nickel-cobalt-manganese in lithium-ion
batteries; nickel-based alloys or ceramics in jet engines; nickel in petroleum catalysts; and rhodium in hydroformylation catalysts.

Demand

Lithium and cobalt demand is being driven by future expectations in battery demand, largely from the increasing manufacture of electric vehicles. There
are variety of lithium batteries on the market but the first three listed in the following table highlights the use of cobalt to help produce batteries
ranging from small electronic items such phones and computers through to electric vehicles